Essay: Taxation Rules And Accounting Treatment Of Advance Payments - A Case Study Analysis.

Does The Arthur Murray Principle Apply To The Company’s Accounting Treatment Of Amounts In Easy Funeral Plan?

Does The Commissioner Or Any Taxpayer Have a Choice In The Method Of Accounting For Tax?

This part of the case is based on the assessable income of Arthur Murray who is running a dance school. According to the case, the main facts of the case are to deal with the business process made by the company and tax assessment of the dance group. From the brief of the case it has been observed that the group has offered certain course-based dance classes to the student and to retain their existence in the competitive world, they have adopted certain business processes. It has been noticed that the company has entered into certain contractual agreement with the students, where the students can choose onetime payment or advance payment. The group regarding the advance payment has taken certain policies. According to the terms of the contract, the students who are choosing advance payment will apply for the refund their monies in case the company has failed to perform their courses in the future. Therefore, the claim for refund the money should be legitimate. Once the students have signed the contract, it will be valid forever. There is no cancellation provision regarding the contract. Further, the company has mentioned two accounting system regarding all the payment made to the company by the students. When for the first time, the students are paying the money; it goes to the suspense accounting. After the completion of the course, the money will credit in the revenue account. The company has maintained certain annual balance sheet to understand the profitable income of the company and it also helps to identify the assessable income of the company. According to the balance sheet of the company, it is clear that the advance payments are transferred to the untaught lesson account. Considering the nature of the advance amount, it falls under the definition of section 25(1) of the Income Tax Assessment Act 1997.

After stating the facts of the case, certain issues have come into the light. It has been observed that not all the monies earned by the company have transferred into one account. There are certain kinds of account. Therefore, the main issue in this case is to assess the taxable income of the company and calculate the advance money earned by the company. In addition to this, the taxpayer company and the Commissioner of Tax should have to consider whether the advance payment is assessable in nature or not. In this case, a clear definition regarding the assessable income should be made.

Assessable Income and Advance Payments

Assessable income is an important part of the Income Tax. According to the provision of Income Tax Assessment Act 1997, when an individual earns money in a tax year, the sum total of such money will be treated as assessable income. Income should be assessed with the purpose to understand the taxable amount. Further, there are certain rules mentioned under the Income Tax Assessment Act 1997 where it has been stated that the nature of the income should be full. The meaning of the same is that the amount of the money should not be advanced in nature. however, certain rules have been prescribed under the Act regarding the advanced payment. According to the Act, an advance payment will also fall under the category of assessable income if there is no refundable option available. When the money are refunded, the amount could not be fall under the provision of the income and that could not be assessed. Therefore, if there is no refundable option exists in the case of advance payment, the same will be assessed. However, in this case, it has been noticed that in case the dance company has failed to provide classes in future, the affected student will get the option to refund their money from the company. management, there is no assurance that all the advance payment made to the company will regarded as income and there is no scope to assess the advance payment.

In Australia, the Income Tax Assessment Act 1997 deals all the taxable provisions and disputes. Many provisions are mentioned under the Act, where the process of assessing an income amount has been mentioned. Further, the provisions regarding deduction process and other applicable facilities have been mentioned under this Act. The primary provision regarding the income tax is definition of income. A clear definition regarding the income has been mentioned under section 6.5 (4) of the Act, when certain amount has been received by an individual or any person who is acting on behalf of the individual in a tax year, the same will be regarded as income. In this part of the report, discussion regarding the calculation of the taxable income has been made. Under the Act, two methods have been mentioned such as earning method and receipt method. According to the general provision, when an individual earns certain money it will fall under the provision of the earning method. On the other hand, when an income has been received for certain parties that will come under the purview of receipt method. For an instance, it can be stated that income received by  an employee will be assessed by receipt method and when certain money derived from investment or from the business, it will fall under the category of earning method. In this case, it has been observed that the company has professed certain businesses and therefore, according to the provision of the ITAA 1997, the income of the company will be assessed by applying the earning method.

Income Tax Assessment Act 1997

The case study includes two companies such as Arthur Murray and RIP Pty Ltd. In this part, a discussion regarding the business process of the latter one will be discussed. The main business of this company is to deal with the funeral ceremony and provide all the facilities to the family of the deceased. The company has taken certain steps to develop the base of the company and there is an advance payment process mentioned under the company. The company has provided certain facilities to the customers so that they can get better facilities in a quicker way. This company has also maintained an annual balance sheet where the annual profits of the company reflect $2.45 million for the taxable year of 2016. Further, it has been observed that the company has given certain invoices to the customers after getting certain amount of money from them. in addition to this, there is a provision regarding the repayment installation pan, where it has been observed that certain credit facilities have been given to the customers. The future payment process of the company reflects the rules of the advance payment process. According to the rules of the company, the customers will have to pay certain amount to the company for getting certain future service from the company. In the words of the provision of the company, if any of the customer will fail to pay the amount or any portion of the amount, it will automatically revoked and the person will not get any further service from the company. They will be restrained to make any claim for refunding the money also. It is required to assess the total income of the company and in this regard, the general provision of the assessable income will be applied. Under the Income Tax Assessment Act 1997, any money earned by an individual could be assessed; however, the nature of the money should be full. In this case, the company has taken certain money from the customers in advance; but there is no provision regarding the refund of the money. Therefore, it can be stated that the nature of the advanced money is full and they can be assessed under the assessable income.

It is required to determine the assessable income amount in respect of both the companies and general provision of the assessable income will be applied in this case. Considering the case study of Arthur Murray, it can be stated that all the advance payment made to the company by the students are refundable in nature. According to the general provision of law, an assessable income should be complete and in case of advance payment, there is a possibility to refund the money. If the advanced amount has been refunded, it will no longer form a part of the complete income schedule. in that case, the income earned from advance payment will not fall under the provision of assessable income.

Applying Earning Method for Accounting Treatment

Further, in case of RIP Pty Ltd, there are certain provisions of future plan, where the parties will pay money to the company for getting certain future benefits. However, according to the rules of the company, no refund will be made to the customers regarding their payment and there shall be no fault from the points of the company or the company will not be liable for any future payment. In this case, the advance payment earned by the company will be assessed and the company should follow all the rules regarding the assessable income of the company.

This case matter of the part is dealing with the provision of taxation rules and the Income Tax Assessment Act 1997. In the previous parts of the essay, it has been observed that certain tax methods are there to assess the taxable income. According to rule 98/1 Para 19, two methods of the tax are earning method and receipt method. The income that is constructive in nature falls under the provision of the receipt method. Further, certain assurance have been made in section 6.5 (4) of the Act regarding the process when certain money are received by the taxpayer. According to the general definition, any amount earned by the taxpayer could be regarded as income. Further, when certain amount has been earned, it will assess by following earning method and when certain amount has been received, it will assess under the receipt method. Sometimes, this method has been regarded as cash and credit. Any person may claim for recover certain amount from the earning money if it has been written under any agreement. It is the liability of a company to assess the taxable income and to select all the effective steps to understand the benefitted provision for the company. Similarly, Arthur Murray has to choose an acceptable method to assess their gross income. However, considering the nature of income, it can be suggested that the company should take earning method to assess all the assessable income provision.

The business methods adopted by the company are quite important and it has been observed that certain methods regarding the advance payment has made. The main commercial approach of the company is evolved with conducting funeral ceremony. For the development of the company and with an intention to sharpen the business attitude, certain future program has been generated and the clients get an option to make advance payment for future services. However, according to the provision of the company, if any of the client has failed to pay any advance payment or miss the same, the company will no longer be able to bound by the contract and the money given to the company will not be refunded. Therefore, it can be stated that all the advance payment of the company will fall under the category of assessable income. Further, the advance payment for future plan will be transferred to a forfeited account and therefore, it can be stated that the account will also fall under the provision of assessable income. Therefore, according to this, income assessment provision will be imposed regarding $16,200 that is credited in the forfeited payment account.   

Business Methods of the Companies

This part of the report is dealing with the provision of trading stock. According to this provision, anything that can be a part of the manufacturing process or anything that can be a part of the exchange or sale of goods will be regarded as trading stock. The general definition of the term has been provided under the provision of section 70.10 of Income Tax Assessment Act 1997. All the matters related to the CST assets and financial agreements are laid under this definition. Further, there should no capital form regarding the capital income in this case. it has further been mentioned under section 70.25 of the Income Tax Assessment Act 1997 that the nature of the things should not fall under the definition of capital income. Any accessories could come under the provision of the trading stock.

Considering the case study of the RIP Pty Ltd, the company has provided funeral assistance to the family of the deceased and in such cases, they have to buy certain cascades or funeral accessories. According to the provision of section 70.10 of Income Tax Assessment Act 1997, all the accessories bought by the company is falling under the category of trading stock. All the elements of the trading stock have been attracted in this case. According to the nature of the accessories, it can be stated that those things are part of the sale of goods and can be exchanged to certain extent. Further, it can be stated that the nature of the accessories are not capital and will not fall under the category of capital income. Further, it has been stated that certain deduction can be imposed on the amount of the company that has been prepaid for the trading stocks of the company. In addition to this, all the amount payable by the company or received by the company could be regarded as income and general provision of deduction could be applied on the income of the company. Therefore, $25000 will be regarded as the income of the company and provision of general deduction can apply on this amount.

In this part, an idea regarding the ordinary income has been given. According to th Income Tax Assessment Act 1997, the term ordinary income could be examined under the lights of the general provision of the income. However, in this case, the term dividends will be fall under the provision of the income. However, advance payment will be excluded from the definition of income. However, in case of non-refundable payment, advance payment will form a part of the income. In this case, a term named long leave payment has been made. According to the ordinary definition of the taxable income, it can be stated that long leave payment could be refunded and therefore, the same could not be regarded as assessable income.

The subject matter of the case is based on the provision of building equipments and land. According to section 100.25 of the Act, building and land falls under the category of CST assets. Further, it has been stated that the term building equipments fall under the provision of capital expenditure. Further, according to section 8 of the case, the provision of general deduction will not be imposed on the CST assets. Therefore, according to the provision, the general deduction process will not be applied on the building equipments.

Reference:

Enste, D. H. 2018. The shadow economy in OECD and EU accession countries–empirical evidence for the influence of institutions, liberalization, taxation and regulation. In Size, Causes and Consequences of the Underground Economy (pp. 135-150). Routledge.

Gale, W. G., Samwick, A. A., and Center, U. B. T. P. 2014. Effects of income taxation-law changes on economic growth. Economic Studies, https://www. brookings. edu/wpcontent/uploads/2016/06/09_Effects_Income_Tax_Changes_Economic_Growth_Gale_Sa mwick. pdf.